Bank of Canada raises its overnight rate by 0.5% to 3.75%

The Bank of Canada surprised everyone by slowing the pace of rate increases, as the economy is facing a potential recession. However, an excessive inflation means it still plans more hikes.

The Governor Tiff Macklem and his team raised the BoC’s key lending rate by 0.5% to 3.75% on Wednesday, which is less than a 0.75% rate hike many expected. The Bank has already increased rates by 0.75% in September and by 1% in July.

Although officials kept relatively hawkish tone in terms of fighting inflation, the unexpected decision will raise some questions about the central bank’s plans to keep damaging Canada’s economy. Other central banks may follow its example, as they also try to determine how aggressively they need to be with their monetary policy.

“This tightening cycle will come to its end. We are getting closer, but we haven’t reached the finish line yet,” – Macklem noted.

Meanwhile, economists responded critically over a perceived communications mistake.

“The central bank is becoming more confident that its actions so far will be enough to restrain inflation, although by imposing lower rate increase than markets were expecting, the BoC risks sending too dovish a message that it will in time have to reverse,” – Stephen Brown, senior Canada economist at Capital Economics, said.

The Bank reduced its growth forecasts, now predicting the economic expansion will stop and probably even go down in the nearest future. The Bank of Canada believes inflation will fall significantly to below 3% (reaching its target range for the first time since the beginning of 2021), as higher borrowing costs will decrease spending.

The Bank cut its GDP forecast for 2023 by half to 0.9%. In its opinion, the economic growth will slow down to an annualized 0.5% in the fourth quarter of 2022.

In a separate report, the BoC increased the prospect of a technical recession. “A few quarters with growth slightly below zero is just as possible as a few quarters with small positive growth,”- the report says.

“Future rate hikes will depend on our assessments of how tighter monetary policy is slowing demand, how supply challenges are evolving, and how inflation and inflationary expectations are reacting,” – the Bank noted.

The Bank’s next rate meeting is scheduled for December 7.